Trade Liberalization and Comparative Advantage: Evidence from Indonesia and Asian Trade Partners

Abstract

This study analyzes whether ongoing liberalization has resulted in more profound trade expansion for Indonesia versus regional partner countries. A gravity model is first employed to find whether regional trade agreements resulted in more significant intra-regional exports or diverted trade. This study applies the generalized method of moment (GMM-sys) and the Poisson pseudo-maximum likelihood (PPML) estimator. Four groups of manufactured products are aggregated according to technology intensity, and two nature-based groups of products are estimated in the dynamic panel model. Additionally, revealed comparative advantage (RCA) and a trade balance index (TBI) for 5120 products are used to map goods based on specialization–advantage patterns. The gravity model indicates that regional trade agreements supported trade in manufactured and naturally sourced goods but not in high-tech and primary goods. Additionally, export expansion took place in goods that revealed comparative advantage and export specialization. Competition has increased between Indonesia and four regional trade partners: China, India, Thailand, and Vietnam. Indonesia gained from trading primary materials while losing in some low-cost manufacturing sectors. The potential for trade expansion remains large, as trade patterns differ among regional partners.

Examining the Patterns and Dynamics of Intra-Regional Trade and Revealed Comparative Advantage in the East African Community

“…Thus, Balassa's concept of "revealed" comparative advantage (RCA) is based on the importance of a particular good's export value in global terms or for a regional grouping, which indicates the extent of its comparative advantage. Balassa's formulation of how to determine products in which a country has comparative advantage is well-known,4 and the original formulation has been Mkenda 10.1163/1821889X-bja10038 | The African Review (2022) 1-37 used in a number of empirical studies (see, for example, Purwono et al, 2022;Chingarande et al, 2013;Oelgemöller, 2013;Keane et al, 2010;Makochekanwa, 2007), and it remains popular in empirical analyses of comparative advantage that include examining the stability of the RCA indices, structural change in the trade pattern, structural transformation, and how a change in policies impact comparative advantage (Brakman et al, 2013;Deb and Sengupta, 2017;Seleka and Obi, 2018; United Nations Conference on Trade and Development (UNCTAD), 2018a).…”

Do Financial Development and Trade Liberalization Influence Environmental Quality in Indonesia? Evidence-based on ARDL Model

“…These outcomes are contrary to the findings of Afrindi et al (2019) for the South Asian region, Liobikiene and Butkus (2019), andShahbaz et al (2013) for Indonesia, where trade openness has supported environmental quality. As noted inNarayan et al (2022),Handoyo et al (2021), andPurwono et al (2022), liberalization of trade has mainly supported exports of natural resource-based industries suggesting that pursuing free trade in Indonesia has worsened the environmental quality of the country. Indonesia's trade expansion has been more intense in the last decade(Purwono et al, 2022), possibly indicating why the results differ fromShahbaz et al (2013), whose data for Indonesia only covers to 2011.…”

“…Besides, by the end of 2021, Indonesia will have 42 bilateral free trade agreements and ratified 15 multilateral free trade agreements (Narayan et al, 2022). The rapid liberalization of trade in Indonesia supported the expansion of exports and economic activity (Purwono et al, 2022;Handoyo et al, 2021). However, as noted by Narayan et al (2022), a large impact of liberalization of trade had supported FDI inflows into export-oriented activities related to the primary sector, with potentially large impacts on environmental quality.…”

The role of cultural distance in boosting international tourism arrivals in ASEAN: a gravity model

“…After more than two decades of regional economic integration (ET) in the ASEAN (Chang et al , 2011; Wong et al , 2011; Purwono et al , 2022), the question remains whether the integration efforts have also supported the tourism sector. We incorporate a dummy variable to capture whether intra-ASEAN tourism is supported by the regional liberalization of goods, services and capital under the ASEAN FTA, compared to trips to extra-ASEAN.…”

“…A second contribution is examining the effects of ET on tourism flows in the ASEAN, where intratrade liberalization has been at the center of the regional plan. Several studies have considered the role of FTA in Asia on trade applications (Handoyo et al , 2021; Purwono et al , 2022), but few studies focus on the role of free trade on tourism flows in the ASEAN.…”